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Lecture 6

SGMA 591 Lecture Notes - Lecture 6: Vertical Integration, Buttermilk, Value ChainPremium

10 pages110 viewsSpring 2016

Department
Strategy and Global Management
Course Code
SGMA 591
Professor
Ayesha Malhotra
Lecture
6

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Corporate Level StrategyVertical Integration6/6/2016 7:04:00 PM
Why do we have firms? Why not pure contracting?
Explanations:
o Entrepreneur bears risk; “residual claimant” (equity)
o Transaction costs
Outline
What is corporate strategy?
Key questions and topics
o Vertical Integration, product, and geographic diversification
Classifying vertical integration
The role of transaction costs in vertical scope
o Contributions of Nobel Prize Winners to our understanding
Costs and benefits of vertical integration
A broader look at vertical relationships
o Key questions and recent trends
Corporate Strategy
Corporate Strategy is the actions/decisions taken to gain Strategic
Competitive Advantage (SCA), through a mix of business activities,
spanning one or more or the following:
o Value chain stages for a given product/service
o Diverse product markets
o Diverse geographic markets
Decisions about the boundaries of the firm
Determines where the firm competes
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o Product scope: how specialized firm is in terms of range of
products it supplies
o Vertical scope: range of vertically linked activities firm
encompasses (how much of value chain it is involved in)
o Geographical scope: geographical spread of activities of
firm
Key Questions
Which activities and businesses should the firm be in?
How should the corporate office manage the portfolio of business
units?
o How to allocate resources?
o How to add value?
Managing the Corporate Portfolio
Key Topics
Vertical integration
Product diversification
Acquisitions
Restructuring
International Strategy
Basic Corporate Goal:
o V(C) > V(B1) + V(B2)
Vertical Integration (VI)
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Classifying vertical integration—doing more things “in house”; firm’s
ownership of vertically related activities
o Backward vs. forward
Backward example: Zara manufactures its own clothes
Ownership and control over production of its
inputs
Forward example: Apple has its own retail stores
Ownership and control of activities previously
undertaken by customers
o Full vs. Partial
i.e. 50% in-house; 50% outsource
The question of “markets” versus “hierarchies (firms)
o Hierarchies = firms because you have a hierarchy of control in
them
Traditional, neoclassical economics
o Adam Smith’s “invisible” hand, i.e. role of “market
mechanism”
o Neglects “visible” hand of firms, i.e., “administrative
mechanism”
Focus on production costs
Discusses the entrepreneur, risk, and uncertainty
Pros:
o More control
o Can lower transaction costs
Cons:
o Can get away from your strengths
o Stretch yourself too thin
Transaction costs the costs to acquire inputs from markets and
to sell their output on markets
o i.e. negotiating, making contracts, monitoring
o Greater transaction costs = firm more likely to extend its
corporate scope
o Transaction-specific components more likely to be made in
house than purchased in external market
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